Return of the veteran raiders
As their former dominance wanes, General Motors and Blockbuster have
become targets of fearsome predators
The Guardian (UK)
Monday May 9, 2005
By David Teather in New York
Like vultures sensing wounded prey, they are circling two of America’s
best-known and badly troubled companies. At an age when most are deeply
into retirement, the billionaire financiers Kirk Kerkorian and Carl
Icahn – two of the most notorious corporate raiders during the hey-day
of hostile takeovers on Wall Street – are back in the headlines.
Mr Kerkorian, 86, disclosed last Wednesday that he had made an offer
for 9% of General Motors, the world’s largest carmaker, which is facing
a worsening financial crisis. Mr Icahn, a relatively sprightly 69,
is simultaneously engaged in an increasingly ferocious attack on the
management at Blockbuster, the video rental chain.
Both men cemented their reputations in the 1980s when their
combative investment style made them among the most feared men in
corporate America, launching hostile takeovers, forcing break-ups
and overthrowing boards.
In his own recent marketing materials to raise money for a planned
hedge fund, Mr Icahn boasts of his spine-chilling effect on chief
executives. “Mr Icahn has a reputation as a formidable adversary,”
it reads. “Companies take him seriously and often take actions to
enhance shareholder value when they know Mr Icahn has a position in
their securities.”
Their pursuit of broken or undervalued companies also made them
enormously wealthy. According to the Forbes rich list, Mr Kerkorian is
worth $8.9bn (£4.7bn), making him the 41st richest man in the world. Mr
Icahn is a few places below, at number 49, with wealth of $7.8bn.
The power that the two billionaires wield has clearly not diminished
with age.
Last week’s disclosure that Mr Kerkorian was taking a sizeable stake
in GM sent shares in the company 18% higher to $32.80. In a statement,
his investment group Tracinda said it had bought 22m shares, around
3.9%, in the past few weeks and was offering $868m for another 28m.
The financier’s lawyer, Terry Christensen, said the investment
was intended to be a passive one. Mr Kerkorian, he added, did not
intend to lift his stake further at present and had confidence in
the carmaker’s management, led by Rick Wagoner, the chief executive.
“He’s not really trying to judge management,” Mr Christensen told
the New York Times. “He’s trying to judge the assets of the company,
the ability of the company to right itself and get going strong again.”
Falling SUV sales
GM’s woes have been widely reported. The company reported a $1.1bn
loss in the first quarter, its worst performance in a decade. It
faces dwindling market share in the US, a worsening product mix as
sales of sport utility vehicles plummet, rising raw material costs
and the soaring cost of providing healthcare for its American workers.
Wall Street, dismissing the comments of Mr Kerkorian’s lawyer, is
anticipating further action.
Among the many suggestions: he could attempt to pressure the company
into selling its profitable finance arm, force his way on to the
board, increase pressure to cut costs, or strong-arm the firm into
handing some of its cash pile back to shareholders. He could also be
just enough of a thorn in the company’s side that it buys his shares
back – delivering him a quick profit.
Mr Kerkorian, born in Fresno, California, to Armenian immigrants,
does have a history of highly active investing.
A boxer and then a civilian pilot for the Royal Air Force during the
second world war, he made his first million in the airline business
when he started out flying charters to Las Vegas after the war.
He built some of the largest hotel casinos in Las Vegas, including
the MGM Grand. He sold his empire there once but returned to build the
MGM Mirage business, in which he still has a controlling interest. The
company earlier this year bought a rival, Mandalay, for $8bn.
He bought and sold the MGM film studio three times. In the most recent
transaction, he sold the business to a group of investors led by Sony
for $5bn.
Mr Kerkorian has already had a brush with the auto industry. In the
mid-1990s he launched a failed takeover bid for Chrysler that left him
with a large stake in the company. When it then merged with Daimler
he made about $3.5bn.
Earlier this year he lost a lawsuit claiming that Daimler’s deal
with Chrysler had robbed shareholders of billions of dollars more by
casting it as a merger when it was really a takeover.
At Blockbuster there is no pretence at civility. Mr Icahn has
attacked the firm’s chief executive, John Antioco, over the size of
his compensation and railed against his strategy to find new revenue
streams to replace the diminishing video rental market.
Mr Icahn, who owns almost 10% of the company, has proposed a slate of
his own directors to be voted on at the firm’s annual meeting. He
hijacked an analyst conference call to discuss Blockbuster’s
first-quarter results and grilled Mr Antioco over his bonuses. He
wants Blockbuster to focus on its core business, pay out huge dividends
and to put itself up for sale.
Poker winnings
Mr Antioco said last week there was no justification for Mr Icahn’s
actions. “Mr Icahn doesn’t know our business,” he said. Blockbuster
reported a first-quarter loss of $57.5m, in large part due to higher
marketing costs. The company is attempting to build an online delivery
service and recently scrapped late fees.
Mr Icahn, who graduated from Princeton University with a philosophy
degree, is said to have arrived on Wall Street with just $4,000 in
poker winnings that he parlayed into his massive fortune.
He is best known for taking over TWA, the airline, in the mid-1980s,
although his skills as a manager are less certain than his abilities
as an investor. The airline went bankrupt under his aegis in the
early 1990s. He also made tilts at US Steel and Texaco. In another
famous assault, he tried to gain control of RJR Nabisco and failed –
but still pocketed $893m when the company, under pressure, spun-off
its tobacco arm and sought a deal with Philip Morris.
Mr Icahn has been active again of late and is living up to his
reputation for being irascible.
While the drug company Mylan Laboratories was pursuing an unpopular
takeover deal of King Pharmaceuticals, he took advantage of the
depressed Mylan share price to snap up 10% and then successfully
campaigned against the deal.
The US energy firm Kerr-McGee thwarted a challenge from Mr Icahn only
after promising last month to carry out a series of disposals and
buy back $4bn of its own shares. The announcement led to an immediate
jump in the share price and a $57m profit for Mr Icahn.
He acquired a stake in the scandal-hit financial services group
Skandia of Sweden at the end of last year and also owns a big chunk
of Eastman Kodak, the struggling photographic firm.
There had been some speculation that Mr Kerkorian was finally looking
to tidy his portfolio ahead of retirement but the GM investment says
otherwise. Mr Icahn clearly has no such plans. He is in the process
of raising $3bn for a hedge fund.
With the fortunes they have already amassed, it seems reasonable to
ask why both men are still happily creating trouble. Mark Stevens,
author of King Icahn, took a stab at an explanation of Mr Icahn’s
motivation at least to a Fort Worth newspaper, close to Blockbuster’s
home town of Dallas. “His motive is always the same, ultimately;
to: A, make money, and B, demonstrate his intellectual and macho
superiority to the people he’s dealing with. It comes out of pride.”
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